Embezzlement Schemes Can Take Years to Detect

October 24, 2017

Long-time employees do it. The most trusted advisors have gone for jail for it. Even a mother-in-law or two has been busted for it.

We’re talking embezzlement, a crime that often takes years to discover and can force even the healthiest of companies into bankruptcy.

According to a study by insurer Hiscox, the average loss for embezzlement cases that took place over five years or more was $2.2 million. It’s more than double that amount when the embezzlement drags on for 10 years or more.

Sometimes, embezzlement schemes can stretch for even longer.

In one case noted by Hiscox, an Iowa credit union employee used two sets of books to orchestrate a theft from the time of her hiring in 1978 until 2015. She withdrew funds and funneled customers’ deposits into accounts held by her and her children. As a result of the $2.5 million embezzlement, the credit union became insolvent and was forced into liquidation.

Likewise, one of the more common reasons that contractors fail is fraud, either by internal or external forces.

There are, of course, steps a contractor can take to protect themselves and their business. For starters, they need to understand the warning signs.

Embezzlers are often eager to know how everything in the office works. Once they learn the processes, they manipulate them for their own gain.

Employers should also watch for employees who are living a lifestyle that is out of proportion to their salary.

An embezzler may come in early and leave late, and never take vacations. This can appear to be dedication to the company, but in fact it is an effort to keep from being caught.

What else can a contractor do? Plenty:

• They can establish stronger internal controls. That means things like revamping check-signing procedures, invoice verification and cash management. To elaborate, whoever cuts the checks cannot sign them. Also, don’t let the payroll department hand out checks; many frauds occur via ghost employees or after employees have left the company.
• They can begin a discreet review of financial, payroll and personnel records that may quickly confi­rm or refute their suspicions.
• They can bring in outside help, including a forensic accountant who’s trained in complex investigations and can uncover problems objectively.
• They can restrict a suspected employee’s access to company bank accounts.
• They can be sure to know their vendors. One embezzlement scheme commonly used involves setting up fictitious vendor companies with Post Office box addresses. Checks written to the fake vendor don’t go directly to the employee, but are available to them.

Finally, the “risk,” as we like to say in the insurance world, can be “transferred” by buying a robust crime insurance policy.

A crime policy typically provides several different types of coverage including employee dishonesty coverage; forgery or alteration coverage; computer fraud coverage; funds transfer fraud coverage; money and securities coverage; and money orders and counterfeit money coverage.

Tom Patton is a Surety Advisor with CCIG specializing in construction bonds. Reach him at TomP@thinkccig.com or 720-330-7922.

Note: Let Tom know if you’d like to talk about a surety bond. Fill out the form below if you’d like one of CCIG’s insurance advisors to contact you about a crime policy.

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